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Digital technologies allow people to take on risks and explore new opportunities

Xubei Luo's picture

In the era of digital technology, the structure of production as well as the interaction between humans and machines is being redefined. The diffusion and application of digital technology can increase productivity in an unprecedented manner, with potential to reshape the role of humans in the function of production. Jobs are the drivers of development and pillars of resilience for people. Five years ago, the World Development Report (WDR 2014),  Risk and Opportunity – Managing Risk for Development, highlighted the role of enterprises in supporting people’s risk management by absorbing shocks and exploiting the opportunity side of risk. There have been heated debates on how technology may lead to risks, such as job loss and structural changes of employment. While the risks are real, the estimates of the impact of digital technology on employment vary widely, from substantial job loss for both skilled and the unskilled workers, to potential job gains thanks to the complementarity of humans and machines, as well as the income and wealth effect derived from higher productivity.

On risk and black swans in developing countries

Carlos Végh's picture

In 2014, the World Bank issued a highly relevant and timely report titled Risk and Opportunity:  Managing Risk for Development. This report analyzed the growing number of heterogenous risks and opportunities affecting developing countries.  A clear challenge in finding a consistent risk management strategy stems from the sharp differences in the risks faced by developing countries; for example, commodity price shocks, financial crises, and natural disasters have all different defining characteristics.  While we could tailor risk management strategies to each one of these types of risks, not having the benefit of a unifying framework can lead to mistakes and mismanagement of the scarce resources available to developing nations to deal with these potentially disastrous events.  Five years after the publication of the report, in a time of growing macroeconomic headwinds for emerging markets and higher exposure to natural disasters, understanding the risks faced by these economies and how to effectively manage them continues to be a key policy challenge.

The role of the World Bank in filling gaps in the global risk architecture

Rasmus Heltberg's picture
In the World Development Report 2014 on Risk and Opportunity we discussed the need for collective action to prepare for, mitigate, and cope with risk. Our report called for more systematic risk preparation by households, communities, and nations. It also called for the international community to step in whenever risks cross borders or are likely to overwhelm countries’ capacity to cope.

The winter is coming: Crisis management should be prepared before a crisis strikes, not in the midst of it

Norman Loayza's picture

2018: It has been 100 years since the Spanish flu pandemic and 10 years since the global financial crisis. The Spanish flu killed more than 50 million people, more than the two World Wars combined. It was so lethal because it occurred when people were at their weakest, suffering from the Great War: malnourished, living in conditions of poor hygiene, on the move as combatants or refugees, and lacking proper medical facilities. A decade ago, the global financial crisis struck, triggering not only a prolonged recession in the United States and other advanced countries but also a deepening distrust of globalization as a force for progress. And this had consequences well beyond the realm of economics. Lacking unity of purpose and grappling with their own domestic troubles, the nations of the West were unable to deal with the Arab uprisings and could not articulate a response to the Syrian crisis. Brexit, the rise of nationalism in Europe, the neo-isolationist policies in the United States, and the recent wave of trade protectionism have deep roots, but their triggers can be traced, in one way or another, to the global financial crisis of 2008.       

Risks and Opportunities of Participation in Global Value Chains

Xubei Luo's picture

Since the first industrial revolution, waves of technological improvement have changed the boundary of production and redefined the role of the state. The information and communication technology revolution has not only increased productivity, but has also reinterpreted the function of time and distance—billions of activities are now linked with “one-click,” and new transactions become possible with “just-in-time” delivery. If the technological revolution has made participation in Global Value Chains (GVCs) somewhat inevitable, it has also accentuated both the risks and opportunities associated with this involvement. On the one hand, participation in GVCs creates new opportunities for profits and expands the market horizon; but on the other hand, it exposes the enterprise sector to risks previously shielded by market boundaries and geographic distances, while increasing the scale of information asymmetry.

Seeing the Human Face of the Global Financial Crisis

Inci Otker's picture

The collapse of a US investment bank in the fall of 2008 turned a severe credit crunch into the worst financial crisis since the great depression, providing a blunt reminder that mismanagement of risks does not go unpunished. What is more, mismanaged risks do not respect boundaries in a tightly interconnected world, damaging anything they touch on their path, hurting especially the poor and vulnerable. While financial systems can contribute to economic development by providing people with useful tools for risk management, such as credit, savings, and insurance, they can create severe crises with devastating social and economic effects when they fail to manage the risks they retain.

Champions of risk management

Rasmus Heltberg's picture

The declaration, in 1979, of the worldwide eradication of smallpox marked a highly unusual achievement. The only human disease ever to be eradicated, the eradication of smallpox is also unusual in being an instance of successful risk management that many people have actually heard about. When it comes to risk management, there is often more attention to the failures than to the successes. While crises, crimes, disasters, and social unrest dominate the front pages, and the attention of our leaders, the champions of risk management whose foresight averts damage and destruction rarely get the credit they deserve.

That is a shame because many development problems have a basis in deficient risk management. Take poverty. While every year many families escape from poverty, others fall on hard times. Illness, for example, is a frequent cause of poverty in developing countries where most people have no health insurance and friends and family provide the only safety net. In fact, the toxic mix of high risk and inadequate risk management are implicated in a host of development problems, ranging from malnutrition, infant mortality, civil strife, crime, violence, to sclerotic private sector investment and job creation. To overcome these problems and prosper, the developing world needs champions of risk management.

Why risk management for development organizations is important

Magda Stepanyan's picture

The following post is a part of a series that discusses 'managing risk for development,' the theme of the World Bank’s upcoming World Development Report 2014.

There are three fundamental challenges in mainstream risk management for development organisations: a culture of blame, lack of adaptive capacity on the part of development organisations and the lack of a shared concept of risk management.

Quite often the manifestation of risks is associated with failure, which subsequently leads to blame. This in turn hinders proactive risk-taking behavior among development organisations and limits their performance. Often we forget that only by failing can we learn to succeed. At the same time, there are also failures that are unnecessary and avoidable if risks are systematically taken into account. Failing to prevent recurrent crises, for example, is unjustified. Recurring drought and hunger are not typical of the Horn of Africa as a geographical region. They are signs of continuing failure on the part of local governments and the international community to address the risks of drought and hunger, which then results in recurrent crises.

Avoiding the “Planning Paradox”: The New World Bank Strategy Must Take Risk and Uncertainty into Account

Norman Loayza's picture

The following post is a part of a series that discusses 'managing risk for development,' the theme of the World Bank’s upcoming World Development Report 2014.

As the ancient Greek philosopher Heraclitus wrote, the only thing constant is change. And with change comes uncertainty. Faced with choices for bettering their lives, people make virtually every decision in the presence of uncertainty. Young people decide what to study without knowing exactly what jobs and wages will be available when they enter the labor market. Adults decide how much to save for retirement in the face of uncertain future income and health conditions. Farmers decide what to cultivate not knowing with certainty whether there will be enough rain for their crops and what demand and prices their products will command in the market. And governments decide the level of policy interest rates and fiscal deficits in the presence of uncertain external conditions and domestic productivity growth.

Myopia and (dis-)incentives - The political economy of managing risk

Jun Erik Rentschler's picture

The following post is a part of a series that discusses 'managing risk for development,' the theme of the World Bank’s upcoming World Development Report 2014.

It is an old and well known criticism of electoral politics: the conflict between short political mandates and long term objectives. To galvanize political support, policy makers not rarely resort to “benevolent” political measures, such as short-sighted tax reductions or infrastructure investments, which are often more beneficial to their own election polls than to their electorate. Such political myopia is alarmingly common, and stands in the way of effective policy making in the long term interest of people.
Risk management is one of the fields in which effective action tends to be impaired by political myopia. For instance, implementing comprehensive regulation in the financial sector, or imposing stringent environmental requirements on certain industries, would help managing the risks of financial or environmental crises. Similarly, the installation of early warning systems for tsunamis or hurricanes could provide decisive information for preparation and timely evacuation.